Chapter 10 Short-run Macro Model

10032007ECON105Chapter 10 Shortrun Macro ModelWhy does Actual GDP deviate from Full employment Potential GDPIn the shortrun spending depends on income and income depends on spendingWho does the spendingConsumersFirmsGovernmentForeign sector1Consumption spending CDeterminants of CiDisposable income Y main determinantDYIncomeTaxesTransfersDIncomeNet TaxesYYT DiiInterest ratesinterest rates falldisincentive to saveincreased consumption spendingiiiWealthWealthTotal value of assets ownedTotal value of liabilities owedNOTEIncomeflow variableWealthstock variableivExpectations about the futureAnticipation that you will be laid off in a couple weeksdecreased consumption spendingGeneral Form of the Consumption FunctionCabYDInterpretation